Business context and reporting period
Levi Strauss & Co. designs, markets and sells apparel under the Levi’s, Dockers, Signature and Denizen brands through wholesale and direct-to-consumer (DTC) channels. It reports three regional segments: Americas, Europe and Asia. This filing covers the quarter ended May 30, 2021 and the six months then ended. Although the request metadata says 2020 Q2, the filing itself is for fiscal 2021 Q2; comparisons are with periods ended May 24, 2020.
Year-over-year comparisons are heavily affected by COVID-19: in the prior-year quarter, substantially all company-operated stores and many wholesale retail locations were temporarily closed. About 91% of company-operated stores were open at the current quarter-end.
Financial performance and key metrics
Dollar amounts below are in millions unless otherwise noted.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $1,276.0 | $497.5 | $2,581.6 | $2,003.7 |
| Gross profit / margin | $750.2 / 58.8% | $169.7 / 34.1% | $1,510.2 / 58.5% | $1,009.0 / 50.4% |
| Operating income (loss) | $106.5 | $(448.2) | $283.6 | $(269.5) |
| Net income (loss) | $64.7 | $(363.5) | $207.2 | $(210.9) |
| Diluted EPS | $0.16 | $(0.91) | $0.50 | $(0.53) |
Reported revenue increased 156.4% in Q2 and 28.8% for the first half; constant-currency increases were 147.5% and 25.1%, respectively. The company said U.S. and China Q2 revenue exceeded pre-pandemic Q2 2019 levels, and Europe exited the quarter above its 2019 level. Six-month sales mix shifted toward wholesale, which generated 64% of revenue versus 59% a year earlier; DTC was 36% versus 41%. Company-operated e-commerce represented 9% of total six-month revenue in both periods.
For the six months, cash provided by operating activities was $248.0, versus $41.4 a year earlier. Capital expenditures were $67.5; investing cash outflow was $70.4. Financing used $453.1, chiefly reflecting debt repayment, dividends and shares withheld for equity-award taxes. Cash and cash equivalents ended at $1,224.1, down from $1,497.2 at fiscal year-end.
At May 30, total debt was $1,273.1, down from $1,564.3 at November 29, 2020. Cash plus short-term investments exceeded debt by $45.5, the company’s reported net-cash position. Reported leverage was 2.0x, based on last-twelve-month adjusted EBITDA. The company reported approximately $2.0 billion of total liquidity, including $693.8 of unused revolving-credit availability. Current assets were $2,970.0 and current liabilities $1,625.2.
Material changes versus the prior comparable period
- The sharp revenue and earnings recovery largely reflects the exceptional COVID-19 disruption in Q2 2020, including $242.0 of incremental pandemic-related charges recognized in that quarter. The prior-year comparison is therefore not a clean indicator of underlying growth.
- Q2 GAAP gross margin rose 24.7 percentage points. Management attributed 17.4 points of that increase to prior-year COVID-related inventory charges; higher DTC mix and favorable wholesale product mix also contributed. For the first half, the 8.1-point margin increase included a 4.3-point contribution from prior-year inventory charges.
- SG&A increased 14.1% in Q2 to $628.2, primarily reflecting more stores operating, higher selling costs, advertising and incentive compensation. First-half SG&A was nearly unchanged at $1,211.9.
- The company issued $500.0 of 3.50% senior notes due 2031 and used the proceeds plus cash to redeem $800.0 of 5.00% notes due 2025. The refinancing generated a $30.1 Q2 loss on early extinguishment, including a $20.0 call premium.
- First-half operating cash flow improved, which management attributed principally to lower inventory spending and higher receivable collections. Inventory increased to $863.4 from $817.7 at year-end.
Outlook, management commentary and risks
Management said it expected adequate liquidity for the next 12 months. It expected to pay down the remaining $200 million of 5.00% notes in fiscal 2021 should business conditions improve; this is conditional, not firm guidance. The company reported no formal revenue or earnings guidance in the supplied filing text. Its restructuring initiative, expected to be implemented through fiscal 2021, had generated $105.2 of cumulative charges and was expected to produce approximately $100 million in annual cost savings. Management said share repurchases would remain on hold; dividends would be assessed quarterly. A subsequent $0.08-per-share dividend was declared after quarter-end.
Management described continuing uncertainty from COVID-19 resurgences, store closures and restrictions, consumer demand, wholesale customer health, supply-chain and shipping disruption, labor availability, and excess inventory or markdown risk. Other cited risks include intense apparel competition, changing consumer preferences, cotton and other input costs, foreign exchange, trade and tariff changes, cybersecurity and data privacy, and the execution and savings risks of restructuring and technology initiatives. Management noted inflation had not materially affected reported-period results but could affect future costs and demand. The company was in compliance with debt covenants at quarter-end and said ordinary-course litigation and customs matters were not expected to have a material impact.
Q2 GAAP net income included a $9.0 income tax benefit; the effective tax rate was favorably affected by a $22.4 benefit related to employee stock-award exercises. The first-half effective tax rate was 1.5%, also favorably affected by a $28.8 stock-award-related tax benefit. Adjusted results are non-GAAP measures and exclude specified items, including restructuring and COVID-related adjustments; they should be considered alongside GAAP results.
Most important facts for investors to verify
- Confirm the period: the filing is for Q2 2021, not Q2 2020, and assess recovery against pre-pandemic 2019 as well as the unusually weak 2020 comparison.
- Review the composition and repeatability of margin and earnings improvement, including the impact of prior-year COVID charges, current-period reversals, channel mix, and non-GAAP adjustments.
- Track store reopening conditions, regional sales trends, digital and DTC performance, wholesale customer exposure, inventory levels and markdowns.
- Verify debt reduction plans, refinancing costs, liquidity availability, debt covenants and the distinction between reported debt and lease obligations.
- Assess whether the restructuring delivers the expected annual savings and whether pandemic, supply-chain, input-cost, currency, tax and trade risks change the outlook.